Stability breeds instability. Think back to a time of instability – in your life, in politics, in financial markets, in a movie you watched. What made that period of time feel so unstable? Probably because it followed a period of comparable stability. The phenomenon – or, rather, the truism – that instability inevitably follows stability was pointed out by Hyman Minsky, a 20th century American economist. The point at which stability turns into instability was later described by investors as being the ‘Minsky moment’.
In some ways, the idea of a Minsky moment is inverse to the rather more optimistic idea that the night is darkest just before the dawn. For investors, the reason why complacency is such a dangerous characteristic is that at the point of maximum stability, instability must be just around the corner. And yet it is during these times of calmness, when everything seems to be going well, that we let our guards down the most. Stability, therefore, should be something to be wary of; make hay while the sun shines, for sure, but beware that the longer stability prevails, the nearer you are to the return of instability. After all, it was complacency, not curiosity, that killed the cat.
This all seems a bit abstract, but applications in your own approach to investing are vast. Avoiding complacency, managing behavioural biases, planning for emergencies, and not getting drawn into appealing sales narratives are important characteristics of successful investors. Behavioural bias is something we mention repeatedly in the blog because of its demonstrably outsized impact on investment results. Although you’ll never eliminate all your biases, heeding Minsky’s warning can help.
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